Russia Just Past Crisis, But Already Up Against Growth Limit

The debate two years ago at President Vladimir Putin’s annual investment showcase in St. Petersburg centered on the direction Russia would take as it moved past the turbulence of oil’s collapse. This time the consensus is that the economy is running aground.

Halfway through what’s likely to be the first year of economic growth since 2014, things are about as good as they’re going to get. A spurt of up to 2 percent forecast by the government for 2017 would put Russia at the limit of what the central bank believes the economy can accomplish.

The irony wasn’t lost on many of the top officials who gathered in Putin’s hometown last week. “We’ve already approached the potential pace of growth,” Bank of Russia Governor Elvira Nabiullina said in an interview with Rossiya 24 state television on Friday. While giving himself and his colleagues a pat on the back for stabilizing the economy with a “balanced” fiscal and monetary policy, Finance Minister Anton Siluanov left no doubt about what’s still lacking.

“A stable macroeconomic situation is only one of the conditions for growth,” he said in a televised interview. “Structural reforms are needed.”

From weak institutions to a poor business climate, the choke points clogging up growth remain the same as before Russia slipped into its longest recession this century. And as Putin considers alternative plans of economic revival, the risk is that the president will settle for a compromise that buys him more time before elections next year, according to Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage.

“The Kremlin may choose a ‘middle option,’ which, in essence, is the continuation of the former policy of avoiding contentious and unpopular reforms,” Tikhomirov said in a report. “This way, social and economic stability in Russia might be ensured for a few more years, even though this will likely result in wider social stagnation and a deeper degradation of the economy.”

During Putin’s first two terms as president in 2000-2008, which coincided with booming crude prices, the economy notched 7 percent average annual expansion. Its potential growth is now less than a third that much, according to Russia’s Finance Ministry and its central bank.

On a quarterly basis, gross domestic product has now gained for three consecutive quarters, Nabiullina said on Monday. The International Monetary Fund puts the nation’s medium-term economic growth at 1.5 percent a year. The government is targeting a GDP increase of 3.1 percent in 2020, with Putin wanting Russia to start growing faster than the world economy two to three years from now.

Speaking at the St. Petersburg International Economic Forum on Friday, Putin didn’t entirely try to feign a return to business as usual. While he said that Russia’s future is in developing the digital economy and supporting high-tech companies, his keynote speech was peppered with the same talking points about improving the investment climate and protecting property rights that have yielded little before.

But by thrusting the lack of reforms to the center stage, some of Russia’s top policy makers are tempering expectations of quick-fix stimulus. After cutting interest rates only twice since September, Nabiullina said the central bank prefers “gradualism” in its decisions even with inflation near its 4 percent target months ahead of a year-end deadline.

For billionaire Oleg Deripaska, a longtime critic of the central bank, the costs of that approach are starting to add up. His United Co. Rusal conducted two Eurobond sales this year and tapped China’s panda bond market for the first time to repay expensive Russian loans, Deripaska told Rossiya 24.

“Today’s policy isn’t just tight — it’s creating usurious conditions,” he said. The central bank is “in no rush, but we have to develop further.”